Mass protests against Prime Minister Benjamin Netanyahu’s controversial judicial reforms had already weakened Israel’s economy prior to the Hamas attack on October 7.
But it was dealt a major blow by the impact of the worst attack in its history, and the war that has followed.
“The Israeli economy may be solid, but it is struggling to withstand this war that has lasted too long,” said economist Jacques Bendelac, who warned of possible recession should fighting persist.
After shrinking by 21 percent in the fourth quarter of 2023, Israeli GDP rebounded by 14 percent in the first three months of 2024, according to official data.
But growth then turned sluggish in the second quarter at 0.7 percent.
The three main ratings agencies have downgraded Israel’s debt.
Fitch predicted in August that the Gaza war — already the longest since the war that led to Israel’s creation — could stretch into 2025.
“There are risks of it broadening to other fronts,” Fitch said.
The focus of the war has in recent days shifted to northern Israel, with Hamas ally Hezbollah battling Israeli forces across the border.
Israel’s credit ratings remain high, but top officials have nevertheless blasted the agencies’ moves.
Netanyahu has insisted that the economy is “stable and solid” and will improve when the war ends.
Israel’s two main growth drivers are tech, which is relatively insulated from the war, and weapons, for which the war is a boon.
But the remaining economic engines of tourism, construction and agriculture “are dying out one after the other”, said Bendelac, professor emeritus at the Hebrew University of Jerusalem.
Israel stopped issuing work permits for Palestinians after the October 7 attack, creating damaging labour shortages, according to Kav LaOved, an Israeli labour rights organisation.
Before the war, some 100,000 such permits boosted manpower in the construction, agriculture and industrial sectors, with tens of thousands of Palestinians also working illegally inside Israel.
Kav LaOved says only 8,000 Palestinian workers have been exempted from the entry ban to work in factories deemed essential.
In economic hub Tel Aviv, construction work is on pause, with skyscrapers and transport projects left half-finished.
Tourism has also plummeted since October 7, with the war driving away holidaymakers and religious pilgrims.
From January to July, Israel welcomed 500,000 tourists — a quarter of the number for the same period the previous year, the tourism ministry said.
